In my previous blog, I used a hypothetical case study to illustrate the financial implications of owning a private property. The case is about a young married couple who plan to invest in a second property (a condominium) in 10 years’ time when they are 38.
The case assumes that the couple will earn $5,000 each at 38 and that they will continue to live in their HDB flat bought directly from the government. I calculated the maximum condo loan quantum based on their projected combined salary of $12,000, taking into account the Total Debt Servicing Rule (TDSR). The maximum loan quantum came up to be $837,648. Keep your finger on this number.
You may have the same property ambitions as this young couple. And you may earn more than them at 38 :). More income means you can qualify for a bigger housing loan.
In this blog, I want to caution you to think carefully about getting a huger loan just because you can. For prudence, I suggest that you stick to the loan quantum calculated on a $12,000 salary, and invest your “spare cash” in other assets like stocks or bonds which are more liquid (easier to turn into cash) and which helps you to own a more varied and diversified portfolio of assets, instead of concentrating the bulk of your money in property.
As before, I will run some numbers to make my point clearer. To start off, suppose that by 38, you and your spouse will earn $7,000 each month instead of $6,000. The calculations below shows what you can expect about your cash flows if you stick to a loan of $837,648.
Your total monthly loan installment will be $4000 + $1,400 = $5,400.
Note – the $4,000 is the monthly installment based on a salary of $12,000. $1,400 is the monthly installment on your HDB loan.
Part of this monthly installment can come from your monthly CPFOA contributions. But do note that the percentage of your gross salary that goes into your CPFOA account declines with age. The specific percentages are:
At 38, 21% of your monthly salary (up to a maximum income of $6,000 per month) will go to your OA account. This is the combined OA savings from you and your employer.
Therefore, the amount of OA savings you and your spouse can use for housing each month at 38 is $2,520 (0.21 x $6,000 x 2 persons). The balance of $2,880 ($5,400 – $2,520) will have to come from your pocket. The case also assumes you have two car loans, with total monthly loan installment of $1,800. Hence, your total cash expense for housing and car loans is $4,680.
Your take-home pay after CPF contributions is $11,600 (14,000 – 0.20 x 12,000), Subtracting $4,680 from your take-home pay leaves you with $6,920 for personal and household expenses. Assume these comprise 40% of take-home pay ($4,640). This means that you will be able save $2,280 each month.
That you are able to save despite more than $2,000 having multiple loans is due to your high incomes. You savings will whittle down to less than $300 if your combined income is $12,000. This shows the importance of making realistic income projections and prudent goal budgets.
A monthly saving of $2,000 may not seem much. But imagine if you invest $2,000 every month in the stock market for 27 years. If the market returns 5% each year (a reasonable assumption), your “insignificant” $2,000-a-month savings will grow to $1.37 million by the time you are 65 and ready to retire. This money will be a handy supplement to your CPF savings.
Lessons from this case:
- Ensure that your housing goals are achievable and sustainable
- Don’t max out on debt just because you can.
- Never let your housing goal crowd out your personal savings goal
Have a look at the CPF allocation table again. Notice that the OA allocation rate declines as you age. This is bad news because falling OA contribution rates, combined with the $6,000 income ceiling means that borrowers will be able to use less of their OA savings to service property loans. This will hurt. Hence, you should factor these rules into your housing plans.